Pensions: Defined Benefit Plans
By: Source: AARP.org Date Posted: 2005-03-20 12:09:00
Do you belong to a pension plan at work? Does your employer manage that fund? If so, you probably have a defined benefit pension plan. This means that your employer has guaranteed that you will receive a specific amount of money when you reach retirement age.
The total amount of your pension will usually depend on how long you have worked for the company and how much money you've earned over the years. The federal government protects your defined benefit pension benefits. This means that you'll receive your pension even if your employer goes out of business or your pension plan closes.
What You Should Know
How DBPs Work
Your defined benefit pension plan will usually begin paying your benefits when you reach retirement age and stop working. These benefits will continue for as long as you live. Most defined benefit plans send you a monthly check. Some plans give you the option of receiving one lump-sum payment when you retire, instead of monthly checks.
Your Spouse
When you join your company's defined benefit plan, you must decide whether your pension will cover you alone, or you and your spouse. If you choose the second option, your spouse can continue to receive your pension checks after you die.
If you decide to have your pension cover only you, you'll receive more money in each month's pension check. Your spouse must agree in writing to this arrangement. It isn't recommended.
Social Security Benefits
Be aware that some defined benefit plans work hand-in-hand with Social Security benefits. Because employers contribute money in your name to the Social Security system, the law allows them to reduce your pension benefit by up to 50 percent of your projected Social Security benefit. If you decide to retire early, most plans will give you additional money until you become eligible for Social Security.
Vesting
You must participate in most defined benefit plans for a certain number of years before you have a legal right to your pension benefits. This is called "vesting." There are two types of vesting formulas:
The "cliff" vesting formula lets you own 100 percent of your pension benefit after you've participated in your company's pension plan for 5 years. This means that if you leave your job in year 6, you can take all of your pension funds with you.
The graded vesting formula lets you own a certain portion of your pension benefits every few years. According to the minimum formula, you would own 20 percent of your pension benefits after 3 years, then 20 percent more in each year after that. Your plan could be more generous than this. Federal law says it can't offer you less than this formula.
The vesting formula gives you an incentive to stay put. Let's say you work for companies with defined benefit pension plans, but never stay with one employer long enough to become vested. You could find yourself with no pension income when you retire.
For More Information
Cash Balance Pensions
Some companies are converting their traditional pension plan benefit formula to a new cash balance pension plan benefit formula. An employee with a cash balance plan is entitled to receive a certain "account balance" when he or she retires. The employee can take this money in either an annuity (with monthly payments) or a lump sum. For more information about cash balance pensions, see the brochure, "Cash Balance Plans: Questions and Answers" published online by the U.S. Department of Labor, Pension and Welfare Benefits Administration.
URL: http://www.dol.gov/pwba/pubs/cashbq&a.htm;
The Pension Benefit Guaranty Corporation
PBGC is a federal government corporation that protects the retirement incomes of more than 43 million American workers. Visit the PBGC Web site for information about defined benefit pensions. If you've lost track of a pension because a company you worked for has gone out of business, merged, or closed down its pension plan, PBGC can help you locate it. You can also write PBGC at 1200 K Street NW, Washington, DC 20005-4026.
URL: http://www.pbgc.gov
The Pension and Welfare Benefits Administration
PWBA, a division of the U.S. Department of Labor (DOL), can provide you with good information about your pension plan options. View a list of PWBA publications at the DOL Web site. They include "What You Should Know About Your Pension Rights," "Simple Retirement Solutions for Small Business," "Top 10 Ways to Beat the Clock and Prepare for Retirement," and "Women and Retirement Savings."
URL: http://www.dol.gov
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